We’re Going on an IPO! The Challenges of Family Business IPO

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Becoming a publicly listed company is a milestone in the life of any organization. The rewards for achieving such a development are undoubtedly very compelling, but the journey is also fraught with challenges that require a substantial commitment of time and resources on the part of the business, not only to aid in the transformation process but also to fulfill the expectations of external stakeholders once the company is listed.

The decision to seek an IPO is typically driven by both financial and non-financial considerations, with the former including access to broader funding, facilitating an exit for a partner and realizing financial gains, and the latter improving a company’s profile, enhancing the founders’ reputation and achieving a legacy for future generations.

Particular IPO challenges for family businesses

While there are a number of challenges to be considered in the context of an IPO, those that are most relevant to family businesses are highlighted below.

1. Family readiness

It is natural for family businesses to have internal differences between family members. These differences usually arise as the business transfers generations, with more members of the family who may have different ideas as to the company’s development becoming actively involved in the day-to-day running of the business.

If these differing views and aspirations are not adequately addressed, they can be detrimental to the stability of the business and lead to division, loss in direction of a successful business and destruction in value. For example, due to inadequate succession planning, the family feud at the internationally renowned Gucci business in Italy escalated, resulting in a total of 18 lawsuits between different family members by 1987.

2. Business readiness

Business readiness is a challenge that is pervasive to all businesses, but is even more pertinent for family businesses. Sustainability and decision-making in a family business tend to be dependent on the founder, while decision-making for a listed company is expected to be centralized and involves all stakeholders as part of best corporate governance practices. For example, owners of family businesses need to be receptive to the possibility of having non-family executives and independent directors involved in its business affairs.

“An IPO puts significant demands on management’s time and resources in dealing with advisors and information requests during the IPO process. What is usually a significant change for family-owned businesses is the additional ongoing reporting and regulatory obligations post-IPO, to manage external stakeholders with more frequent performance reporting, managing analysts and dealing with a governance framework with non-family members on the board. This increased workload should not be underestimated at the risk of neglecting the day-to-day business and resource planning and should be an important consideration for the board and senior management in the run up to an IPO,” says Adnan Fazli, Head of Equity Capital Markets at Deloitte.

3. Loss of control

IPOs result in the dilution of control (dilution of 25 to 55 percent depending on the exchange) which means that family members will no longer have complete control over the decision-making process in the business. Furthermore, the company will be held accountable to external parties such as active investors and, in certain instances, even competitors.

Finally, decision-making in family businesses is influenced by the long-term reputation and values held by the family founders and their offspring (i.e. contribution to the social welfare of society), which might not be the main focus of IPO investors who are more attracted by the company’s profitability.

4. Communication

According to Tharawat magazine, IPO communication consists of three aspects: explaining the business; explaining the IPO transaction; and post-IPO disclosure requirements.4 Unlike other companies, family-owned businesses tend to more closely guard information and are more information sensitive.

Investors in an IPO transaction will heavily scrutinize the target business. Family businesses have to be in a position to explain their historical results and business plan going forward. Special attention will be given to related party transactions and whether conducted in the normal course of business. Equally important is communication with existing stakeholders (e.g. the employees) who should not feel threatened by the IPO and its added pressures on the business. Successful IPOs include remuneration schemes that increase management and employees’ commitment and loyalty throughout the IPO process.

Additionally, it is critical that the IPO process remain highly confidential to prevent potential adverse impact on value. Once a company announces its intention to float, the company is expected to operate and will be viewed by analysts as a publicly listed company when comparing it to its peers.

Finally, post IPO communication with investors makes significant demands on management, as more frequent and timely financial reporting is required. Listed companies are expected to regularly and openly communicate their management team changes, historical financial performance and forecast strategies, disclosures that family businesses are not typically used to.